An Experimental Investigation of Select Remunerative Factors in the "Pay-For-Performance" Paradigm

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This dissertation presents the results of three experimental research studies investigating factors within the executive compensation process and the effects these factors have on the pay-for-performance paradigm. The first study examines the influence of individual anchoring and the effects of private versus public decisions upon compensation awards by subjects role-playing as either an outside CEO or a non-CEO director. Research results show that subjects anchor to personal pay levels, CEO subjects shield the focal CEO from declining compensation when performance is below average, and that this phenomenon is mitigated when the individual director-subject decision is deemed to be made public. The shielding of compensation is consistent with Social Comparison Theory in that the CEO-subjects identify to and protect the CEO by limiting negative compensation awards of the CEO, and thus, representing an agency cost.
The second study examines affect as an influencing factor on individual decision makers in the compensation setting process. Results are consistent with Prospect Theory in that, in the absence of a tangible payoff, personal affect is the outcome monitored and used by individuals in the decision process in the determination of a gain or loss. Using personal pay and personal performance as anchors for subjects role-playing as directors
on the compensation committee, results indicate that subjects make decisions to
maximize (minimize) positive (negative) affect in compensation awards to the focal CEO. The findings suggest that although individual anchors may interact and add to the complexity of the decision process, the outcomes are consistent with Prospect Theory.
The third study examines group decision making as compared to individual decisions when making compensation awards. Results show that in a committee of individuals where a majority of beliefs is present, group polarization occurs and the compensation results are exaggerated as compared to the individual beliefs. The findings also suggest, though, that the appointment of a leader as chair of the committee, either in the majority or minority view, has a moderating effect on the group outcome. These results highlight the potential for agency costs in the group decision process that may be found in the executive compensation-setting environment.
Overall, these results add to the knowledge of factors affecting executive compensation. These studies provide evidence that individual anchors, individual performance, individual affect, and the group decision process may add to agency costs and be contributing factors in the imperfection of the pay-for-performance paradigm.